Composition Levy under GST

  • Contributed by CA. Anil Gupta

    1. What is Composition Scheme in current State Indirect tax?

    Considering the compliance complexity for small dealers, the current state indirect tax
    regime has provided a simpler compliance for their business called ‘composition
    scheme’.

    Under this scheme,

    1.1 You are required to pay tax at certain percentage of turnover.
    1.2 You need not maintain the detailed records and documents nor required to follow the rules and procedure of issuing tax invoice, maintaining stock, filing of invoice-wise sales & purchase etc.
    1.3 You only need to file periodic return usually on quarterly basis.
    1.4 ITC will not allowed
    1.5 Not allowed to collect tax on sales.

    Thus for small business, it is simpler to calculate tax liability and save lot of time and energy involved in maintaining the detailed records.

    2. What is Composition Levy Under GST?

    In GST, similar benefit is being extended to small dealers as in case of current state indirect tax, who can opt for their compliance under composition scheme. In GST, this is referred as ‘Composition Levy’ and the registered taxable person who is allowed to pay tax at certain percentage of turnover during the year is called as Composition Tax payer.

    Threshold Limit:

    • The proper officer may permit, a registered taxable person, whose aggregate
    turnover in the preceding financial year did not exceed fifty lakh rupees.

    Aggregate Turnover:

    • Taxable supplies;
    • Exempted supplies;
    • Export of goods and/or services of a person having the same PAN;
    • But exclude the taxes.

    Rate of levy:

    • Rate of levy is yet be notified, shall not be less than 2.5% in case of manufacturer.
    • In any other case, shall not be less than 1%

    3. Non applicability of Composite Levy [first proviso to section 9 (1)].

    • Who is engaged in the supply of services; or
    • Who makes any supply of goods which are not leviable to tax under this Act; or
    • Who makes any inter-State outward supplies of goods; or
    • Who makes any supply of goods through an electronic commerce operator Who is required to collect tax at source under section 56; or
    • Who a manufacturer of such goods is as may be notified on the recommendation of the Council.

    Second proviso to section 9 (1).
    The permission shall not be granted to taxable person unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.

    Case Study-1:
    Mr. Subhash a proprietor engaged in trading activities. Mr. Subhash have five trading unit in five different state registered with the same PAN (AWUPJ0707D). The Financial year 2017-18 shall be the very first financial year for the GST. Suppose Mr. Subhash effected sales of Rs. 70, 00,000 during the preceding financial year in aggregate. Whether Mr. Subhash will be eligible of composition levy in financial year 2017-18.

    Ans. No. Mr. Subhash is not eligible for Composition levy in financial 2017-18. Why?
    The thresh hold limit for composition levy is Rs. 50,00,000 in the preceding financial year as provided in section 9 (1) of the Act.

    It is nowhere mentioned that the turnover under GST shall be taken in the preceding financial year for the calculation of threshold limit. Hence, Mr. Subhash will not be eligible for composition levy in the financial year 2017-18 as the aggregate turnover of Mr. Subhash in the preceding financial year exceed Rs. 50,00,000 under the old laws.

    Case Study-1A:
    What will be your answer if the Turnover of Mr. Subhash from all of the unit is Rs. 48, 00, 0000 in the financial year 2016-17?

    Ans. The answer is Yes, Mr. Subhash is eligible for composition levy. Why?
    As per the provision of section 9 (1), as the aggregate turnover in the preceding financial year was 48, 00, 000.

    Case Study-2:
    Mr. Subhash a proprietor engaged in trading activities. Mr. Subhash have five trading unit in five different state registered with the same PAN (AWUPJ0707D). In the Financial year 2017-18 sale effected by Mr. Subhash was 49, 00,000. The above turnover include sales of Rs. 10, 00,000 on account of Non-taxable supply effected by one of the unit. Whether Mr. Subhash will be eligible of composition levy in financial year 2018-19.

    Ans. No, Mr. Subhash shall not be eligible for composition levy in spite of turnover of Rs. 49, 00,000 in the preceding financial year. Why?
    As per the provision of section 9 (1) (b) of the CGST/SGST Act, the person making non-taxable supply shall not be eligible for composition levy.

    In the above case the aggregate turnover is Rs. 49, 00,000 which includes non-taxable supply effected by one of the unit. Hence, Mr. Subhash shall not be eligible for composition levy.

    Case Study-2A:
    What will be your answer if the above supply includes Rs. 10, 00,000 on account of exempted supply instead of non-taxable supply?

    Ans. Yes, Mr. Subhash shall be eligible for composition levy in financial year 2018-19. Why?
    Section 9 (1) (b) restrict the person effecting non-taxable supply. There is no restriction on the person effecting exempted supply.

    However exempted supply is also not chargeable to GST. Further, exempted supply and non-taxable supply are different. Non-taxable supply is supply which is outside the ambit of GST while exempted supply is supply which are chargeable to GST but has specifically been exempted from GST.

    4. What are the Conditions for composition Levy

    4.1 Payment of composition tax – If the composition dealer is in the trade of supply of goods and supply of services, then composition levy will be applicable for both supply of goods and services.

    4.2 Applicable for all transaction under the PAN – Composition levy will be applicable for all business verticals operating within state or Interstate under the same pan.

    4.3 Shall not collect tax – The composition dealer shall not collect tax on all his outward supply of goods and / or services.

     4.4 Cannot claim Input Tax Credit – The dealer cannot claim and is not eligible for ‘input tax credit’ on all his inward supply of goods and/ or services.

    Some FAQs:

    Q. What is the scope of composition scheme under GST?

    Ans. Small taxpayers with an aggregate turnover in a financial year up to [Rs. 50 lakhs] shall be eligible for composition levy. Under the scheme, a taxpayer shall pay tax as a percentage of his turnover during the year without the benefit of ITC. The floor rate of tax for CGST and SGST shall not be less than [1%]. A tax payer opting for composition levy shall not collect any tax from his customers. Tax payers making inter- state supplies or paying tax on reverse charge basis shall not be eligible for composition scheme.

    Q. Whether the composition scheme will be optional or compulsory?

    Ans. Optional.

    Q. Will a taxable person be eligible to opt for composition scheme only for one out of 3 business verticals?

    Ans. No, composition scheme would become applicable for all the business verticals/registrations which are separately held by the person with same PAN

    Q. Can composition scheme be availed if the taxable person effects inter-State supplies?

    Ans. No, composition scheme is applicable subject to the condition that the taxable person does not affect interstate supplies.

    Q. Can the taxable person under composition scheme claim input tax credit?

    Ans. No, taxable person under composition scheme is not eligible to claim input tax credit.

    Q. Can the customer who buys from a taxable person who is under the composition scheme claim composition tax as input tax credit?

    Ans. No, customer who buys goods from taxable person who is under composition scheme is not eligible for composition input tax credit because a composition scheme supplier cannot issue a tax invoice.

    Q. Can composition tax be collected from customers?

    Ans. No, the taxable person under composition scheme is restricted from collecting tax. It means that a composition scheme supplier cannot issue a tax invoice.

    Q. What is the threshold for opting to pay tax under the composition scheme?

    Ans. The threshold for composition scheme is Rs. 50 Lakhs of aggregate turnover in financial year.

    Q. What are the penal consequences if a taxable person violates the condition and is not eligible for payment of tax under the Composition scheme?

    Ans. Taxable person who was not eligible for the composition scheme would be liable to pay tax, interest and in addition he shall also be liable to a penalty equivalent to the amount of tax payable.

    Note:
    Views presented in this article are personal view of the author. Information presented in this article is intended for information purpose only and does not constitute any legal opinion or advice. Readers and Users are requested to seek formal legal advice prior to acting upon any of the information provided herein.